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I have both a SIPP and a Stocks and Shares ISA. So, when I have some spare cash to invest, I have a decision about what platform to use.
As I see it, both have some potential pros and cons.
Let’s take a look at them.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Tying cash up over the long term
One big difference is that a SIPP’s explicitly designed as a long-term investment vehicle. That makes sense, as it’s a pension.
So the SIPP structure’s designed with a big limitation: the money inside it can’t be withdrawn until you reach 55 (rising to 57 in a couple of years). By contrast, someone can take money out of their ISA at any time.
If the focus is on short- to medium-term costs then the SIPP limitation could be very frustrating.
Then again, it does achieve the objective of stopping people below 55 from dipping into their pension to fund living costs along the way.
Is there such a thing as free money?
Such an enforced discipline could be helpful. But is it enough to explain why someone would tie their money up for decades in a SIPP?
Not necessarily. Another factor’s at play: free money.
Well, it’s not exactly free. Just as there’s no such thing as a free lunch, there’s rarely such a thing as free money.
More accurately, at least for taxpayers, what the Exchequer is doing is giving you back with one hand what it’s already taken with the other. In other words, the ‘free’ money is tax relief.
Still, that can be a substantial financial benefit even for ordinary rate income tax payers — and especially for higher rate and additional rate taxpayers.
That can be a significant motivator. It explains why I’ve chosen to invest through a SIPP in some cases.
The Stocks and Shares ISA doesn’t offer such tax relief.
However, for investors who meet certain criteria (such as starting before they hit 40), a Lifetime ISA can also offer some what the government describes as a “25% bonus” on contributions up to £4,000 a year.
I’d happily take advantage of that — if only I met the criteria!
Shielding gains and income
Both types of ISA I mentioned (as well as a Junior ISA) keep dividends or capital gains inside their tax-free wrapper. So does a SIPP.
That effectively means that the portfolio value can hopefully grow, unimpeded by income tax on dividends or capital gains tax.
In it for the long term
An example of a share I own in my SIPP is Trainline (LSE: TRN) – and its recent performance is abysmal! It’s down 43% in a year and has more halved over five.
Plus it doesn’t pay a dividend. So it’s academic to me for now that any dividends from it would be exempt from income tax thanks to me holding it in my SIPP.
So why do I own it?
The Trainline share price has tanked because of a perceived big risk: the government plans a similar platform run by a nationalised railway company.
I think the fears are overblown. It took Trainline many years to build what it has. I think the putative rival will either not materialise any time soon, or will simply try to buy Trainline’s technology.
Meanwhile, Trainline is profitable and has a strong market niche.
